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Column-Amuay, Isaac ambush complacent oil market
Oil products markets are facing a potentially devastating one-two punch after a summer of complacency over falling fuel inventories looks primed to blow up in traders' faces.
August 28, 2012 12:00 by Reuters
Oil products markets are facing a potentially devastating one-two punch after a summer of complacency over falling fuel inventories looks primed to blow up in traders’ faces.
For months markets have largely shrugged at dwindling Atlantic basin distillate inventories while stubbornly tight gasoline stocks only recently came into focus.
Now the market faces the possibility of a sudden plunge in fuel production from a devastating refinery fire in Venezuela this past weekend and from Tropical Storm Isaac, which is aiming straight at the heart of Louisiana’s oil refining sector. For separate stories see
Either of the two would have likely sent buyers scrambling to secure alternative supplies. Combined, the two supply losses could trigger sharp increases in fuel prices in the worst case scenario.
Although U.S. distillate stocks have recovered in recent weeks, inventories in the Gulf Coast remain at their lowest levels since 2009.
Despite this situation, oil traders have been reluctant to bid up longer-dated heating oil futures, betting that higher global refining runs to meet gasoline demand will also push up distillate stocks.
Without the incentive from forward markets to boost production sufficiently to build stocks, oil companies have let inventories dwindle.
European distillate stocks, in particular, are very tight as regional refiners rely as much as possible on stockpiles and imports to avoid holding inventory in the event the Euro crisis aggravates the region’s weak economy and leaves them stuck with expensive, unsold inventory.
With Tropical Strom Isaac poised to make landfall among the refineries of the Louisiana Gulf Coast the risk has mounted that the market will have to turn to inventories to meet late summer demand.
Already Marathon Petroleum’s 490,000 barrels per day Garyville, Louisiana refinery, a major distillate exporter, has begun to shut down as a precaution.
The United States is fueling the rest of the world with some 1 million barrels per day of diesel and any significant flooding or wind damage to Louisiana-area refineries will have a knock-on effect in global oil product markets.
Many of the refineries at risk were affected by Hurricane Katrina in 2005 and can be expected to have bolstered their storm defenses.
Still, a direct hit from a hurricane or tropical storm, even one far less powerful than Katrina, has the potential to cause significant production losses.
Add to that the serious accident at Venezuela’s 635,000 bpd Amuay refinery, an important exporter of refined products to Latin America and the Caribbean, and the prospect of intensified competition for oil products looms larger.
On the crude oil side of the ledger, the situation is set up differently.
Traders have ridden the distortions in the Brent market and a refining-margins driven downturn in Russian crude oil exports to easy profits in recent weeks.
But a big hit to U.S. oil refineries could seriously impair crude demand on the Gulf Coast, which would have a ripple effect elsewhere in the world.
Likewise, although developed world crude oil inventories are healthy, much of this surplus is in the United States. These excess stocks would be effectively neutralized if a number of American refineries were knocked out for some time.
Similarly, long-term problems at Amuay after last weekend’s deadly blast could lead OPEC-member Venezuela to step up crude oil exports and increase oil product imports.
Although Venezuela has said it anticipates restarting the refinery quickly, state oil company PDVSA’s shaky track record in refining over the last decade ought to lead traders to take these assurances with a grain of salt.
This sets up a possible scenario of a sudden rise in surplus crude oil supplies just as refineries worldwide curtail operations for routine maintenance ahead of the northern hemisphere winter.
That could easily aggravate the crude oil supply surplus anticipated in the fourth quarter by the major forecasting agencies.
The major impact of the storm, however, is likely to be a renewed focus on oil product inventories from traders. This could well boost refined products prices at the expense of crude oil, improving refining margins and encouraging global refiners to step up fuel production.
In the short term that is likely to be good for crude. After all, higher runs means more crude demand. But in the medium term, particularly if the economy continues to splutter along, it is likely to lead to a sharp increase in fuel stocks that, if sustained, would knock one support out from under crude prices heading into 2013. (Editing by Andrew Hay)